For 2012, I’m focusing on using my Quickbooks reports to design a more realistic budget for the New Year. In the past, I tried creating a “utopia” style budget that was unrealistic and disappointing each month. Yet, before I can take on the task of formulating my budget, I need to really look at where my money went this year. I like how Newlyweds on a Budget calculated her expenses based on every $100 so I decided to do a similar calculation:

For every $100 I spent.…

$45 went towards rent and utilities. Ouch! Mock me all you like but that’s the price I pay for living in the second most expensive city in the US.

$8 went towards the car. Much better. Must have something to do with being a one-car family and biking a lot.

$7 went towards the purchase of household items. This was mainly our new couch and refrigerator. Moving often equates to new purchases.

$13 was applied towards groceries. I think we can do better than this in 2012.

$7 was applied towards business expenses.

$4 went towards personal items like clothing and doctor’s visits.

$3.50 was applied towards meals eaten out and entertainment, such as movie rentals (Netflix and Redbox).

$10 went towards a bunch of miscellaneous expenses like my Starbucks, postage, travel, gifts, insurance, etc.

$2.50 measly dollars was applied towards our savings. I think I need to be grounded or placed in the time out chair.

I can definitely improve on groceries, business expenses, household purchases (I’m hoping there just aren’t any this year!) and miscellaneous expenses. I’m sort of stuck in a lease this year, so my rent and utilities will remain about the same. However, I’m giving myself a big pat on the back for reducing my meals eaten out and entertainment by $1.00. I’ve also reduced my Starbucks expense by 90-cents per $100 as well. If I can cut out a few more dollars per category (minus rent/utilities), I should be able to boost that savings amount to $7 per $100 which would put me on target to meeting next year’s savings goal.

Quarterly updates should help.

How do your expenses stack up?

It’s time to get creative when it comes to budgeting. Instead of listing the pros and cons and then explaining how to go about creating one, I’m going to experiment a bit here.  I’m breaking it down into steps, like a recipe. Here’s my attempt at creativity (or a new perspective on budgeting):

A Yummy Budget Recipe

• Light that fire under your butt and Pre-heat your bank account
  • What are you spending? Do you even know? Look at one month’s worth of spending and add it up.
  • How much do you make? Add up all your income.
• Add a pinch of calculations
  • Now that you know how much you spend and earn, what’s the difference? (This is second grade math, people.)
  • The total is what you have left over.
• Dice the expenses
  • Did you find that not much is left over at the end of each month?
  • Time to dice up the expenses and reduce them to less than your income.
• Add a splash of savings
  • Now that you have something left over, automatically deposit it into savings.
• Bake the budget for 3 months
  • Reevaluate your expenses and income (or budget) after 3 months.
  • Are you on track? Are you saving more now? Fix it if need be.
• Serve with humble pie
  • Now that you’ve calculated income and expenses, you have an idea of what’s a “need” and what’s a “want.”
  • Stick to what’s a “need” and an occasional “want.”

So my recipe isn’t an exact science, but neither is a budget. The bottom line is spend less than you earn, no matter how you get there!

How do you budget?

Saving for retirement is one of my goals for this year that I’m making progress on. I know that I’m getting a late start, but I have a bit of a cushion because I do expect to receive a pension upon retirement. However, my pension alone isn’t enough. And, according to an MSN article, I’m not the only one who may be a bit short come retirement. Not only that, the MSN article makes a point that $1,000,000 may not even be enough to retire on in some instances. Here’s the skinny on why a million may not be enough:

• Once you begin drawing on your retirement accounts (401K, IRA’s, mutual funds, etc.) you have to pay taxes
• The rule of thumb is to pull only 4% of your retirement savings. Depending on your cost of living at retirement, that figure may not be enough.
• Seniors today are still paying off their mortgage (a huge drain on retirement funds)
• Health care costs can be higher than expected

If retirement is still twenty or more years from now, like it is for me, there are some ways to minimize retirement costs and boost retirement savings. First, boosting savings is critical to make sure that retirement funds are well padded. The first step is to create a budget (almost always the first step to increasing savings and/or cutting expenses). This year, I’m working on saving 12% of my income with 5% allocated to retirement. This figure will have to increase within the next 5 years so I can save at least 10-12% of my income just for retirement. I’m predicting the missing 5-7% will come from additional income (ie. a raise or increase in passive income). Currently, my retirement savings are deposited into a higher return account, like a mutual fund. Once I increase my retirement amount to 10-12%, the additional 5-7% will be allocated to a 403(b) in my case (the equivalent to a 401K). To summarize boosting my retirement savings, this is what it will/or does look like:

• 5% currently deposited into a mutual fund
• 6% currently deposited into my pension plan plus an employer match
• 5-7% to be deposited into a 403(b) in the near future

I’m counting my pension plan in my summary here but I don’t have any control over the allocated amount, so I don’t count it in my total 10-12% figure.

Next, I need to make sure that my expenses are greatly reduced come retirement. Since the MSN article mentioned that mortgage payments are taking a big bite out of retiree’s funds, my number one goal is to be mortgage and/or rent free. Since I don’t own a house yet, I have a couple of options; A.) purchase a house and pay it off before retirement by making additional mortgage payments, B.) find alternative ways to live rent/mortgage free such as building a tiny house, or C.) live cooperatively with other family members and friends (my husband would be dead set against this) to minimize housing costs.

Health care expenses also seem to make or break a retirement account. I feel I have some control over my health by eating healthy, exercising, and taking preventative measures to stay fit and agile. Of course, there’s always the unforeseen disease that I can’t control. Making sure I have access to affordable healthcare will hopefully reduce expenses.

Finally, eliminating excessive debt will allow me to live off 4% of my retirement savings each year. Paying off student loans and any credit card debt (thankfully I don’t have any credit card debt now) a few years before retirement will be essential to making that money last.

My goals for reducing expenses before retirement are as follows:

• Be mortgage and/or rent free
• Stay fit and healthy (eat right and exercise!)
• Pay down all debt a few years before retirement

If I were to create a time line of events for my retirement path, it would look like this:

Save 5% toward retirement in 2011 => keep saving! => purchase or build a house by 2014 => keep saving! => increase retirement savings by an additional 5-7%  by 2016=> pay off student loans (this is my only debt right now) by 2021 => keep saving! => increase mortgage payments to be mortgage free by 2031 => keep saving! => retire by 2036

That looks doable!

I love timelines. Notice, however, I haven’t crunched any numbers. That step will come within the next couple of years. Then my timeline will be more robust!

What does your retirement path look like?

I just read an article on MSN.com stating that most people don’t have the recommended 6-months of living expenses saved up. Part of this is due to the crummy economy and the difficulty of saving that much money if work is sporadic. Take for instance a person who makes $50,000 and needs $3,000 per month for living expenses. (Okay. Maybe my figures are high because I live in an expensive city – please comment if this is the case). They need to save $18,000 for that 6-month cushion. If they can save $500 per month towards an ER fund, it will take them 36 months, or 3 years to save that amount. And that doesn’t take into consideration any retirement savings.

I know that I don’t have 6-months of living expenses saved up in my emergency fund. Instead I have some savings in my ER fund, some in my wealth building fund, some in my large purchase fund, and some slush money that covers months when I come up short. But even with all of that added together, it wouldn’t cover 6-months of expenses. What would it take for me to save up my 6-month cushion? At $500 per month it would take me 5 years to sock away enough for 6-months of expenses. I think I’d rather invest half of that into other accounts and build wealth myself.

So how does your ER fund match up?

I’m going to change things up a bit with the way I post, sort of along the lines of a series. Though, to be honest, I’m horrible at following through on series-based posts. So, to start my problem/solution posts out right, I’ll include a link in my navigation that will organize my series making it easier to find them (and a reminder to myself to keep it going!).

The Scenario

Every two weeks, your pay check gets deposited directly into your bank account and you’re flush with cash. You feel giddy at the sight of those dollars and cents appearing in your bank account. However, after paying a few bills, some which may be past due, your bank account is nearly on empty and that euphoric feeling you had just days ago has now turned to angst. Not only is your bank account precariously low, if any emergency were to pop up you’d be near bankrupt, or at the very least, in a financial pickle.

Confronting the Problem

It’s not uncommon to first blame a low paying job as the reason you’re constantly broke before your next pay check arrives. If you aren’t the only once accessing your accounts, you might even blame your significant other for being the spend-thrift.  But the real reason you’re broke between pay periods is that you haven’t been tracking your spending or income. Your cycle might look something like this:

• Payday comes- pay all the bills that have been piling up. This might also include an overdraft or two and a late charge.
• Payday goes – most of your money has been spent keeping up with your bills. You barely have two nickels to rub together, but somehow you can still afford to eat lunch out with the girls.
• Reality sets in -you’re tired of feeling broke all the time. You know you make enough money; heck you’ve compared your income with your friends and it’s not all that different. It’s time to make a plan.

Finding the Solution

The solution doesn’t need to be complicated. It’s a matter of sitting down and figuring out what bills you must pay, what expenses you’d like to keep, and what needs to be eliminated. This is called making a budget. Using an excel spreadsheet works for me, but you might want to give Mint.com a try. By tracking your expenses, you see first hand where all your money goes each month. A few good steps to follow include:

• Track your expenses – find out where your money is going. Are you eating out too much? Are you spending too much on your cell phone plan or on cable television?
• Make a budget – calculate your monthly expenses, both needs and wants. If you’re not sure, estimate certain items, but once you’ve tracked your expenses, go back and revise the estimate to an actual amount.
• Take your income into account – now that you know how much you need each month to live comfortably, add in your income. Will it cover all of your expenses? Can you increase your income by freelancing?
• Start a savings fund - by having a few dollars saved up in an account helps alleviate some of the stress of an empty bank account.

This isn’t meant to be a one-size-fits-all plan, just a good starting point if you’re ready to begin working on becoming financially responsible. Look for my next problem/solution post on ways to start a savings account.

How have you overcome a financial problem? Did you ever feel broke before payday and realize it was because you weren’t keeping track of your expenses? What topic might you like to see covered in this series?

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